By Michael Cintolo, Vice President of Investments, Editor of Cabot Market Letter and Cabot Top Ten Report
From Cabot Wealth Advisory 3/15/08  Sign up for free Cabot Wealth Advisory e-newsletter

Anyone can have a bad day, when one thing leads to another, which leads to another, and it seems that anything that can go wrong, will. No matter how you might try to avoid days like that, the fact is, they're going to happen. The key is what you do in response.

It's the same with investing, especially nowadays, when the volatility has become extreme. One day, the market is sinking to new lows. The next it stages its biggest up day in five years. And two days after that, the market gaps down more than 1% on more bad news and credit fears...before reversing to close higher on the day!

But even during "normal" times, the stress can get to you. You might be fully invested or on margin when the bulls are running, and a one- or two-day shakeout drops your total account by 5% or more.  And that doesn't even touch on earnings season, when one of your holdings can magically jump or plunge 15% or more based on its quarterly report and conference call.

I'm convinced that the best way to deal with this stress is to have a game plan ahead of time. If you wait until things are blowing up in your face, it's too late—by then, your emotions will get out of control and you're likely to do the exact opposite of what's constructive.  

That's why now is the time to formulate a system that works for you. You're more than welcome to start with the general philosophy from one of our newsletters and then tailor it to your own personality. Some rules, like cutting losses short when buying growth stocks, are absolute. Others, like how to sell (scale out of a position? All at once? Set a profit target?) can be adjusted to your own trading and investing goals.

Another thing to work on is your portfolio management plan, a topic that's near and dear to my heart. (My favorite saying on the subject: How you manage your portfolio can make the different between being up 20% in a good year and being up 120%; it's that important.) Questions to consider include how much money (as a percent of your overall portfolio) do you want to commit to each new buy? How much do you want to risk (again, as a percent of your total account) on each trade? When, if ever, do you want to go on margin?  

I'm sure that if you lined up 100 random investors and got their year-to-date results, and then ordered them from best to worst, the top 10 have likely stuck to a sound market timing and stock selection system (which likely would have had them heavily in cash for much of the year), while the worst 10 had no system at all, letting their emotions of panic and greed take them in and out of stocks at the worst times.

So, with the market still in a downtrend, don't ignore your portfolio. If you haven't already, get working on your system so that you can do what we all dream of doing—making (and keeping!) truly big money during the next bull market, partly by handling the market's daily dose of stress that it's so adept at delivering.

Click here for more information on Cabot Market Letter or Cabot Top Ten Weekly.

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Tips on Handling Market Stress  3/15/08
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